893.51 Salt Funds/265

Memorandum by the Chief of the Division of Far Eastern Affairs (Hamilton)

Reference Chungking’s telegrams no. 34, January 12, 3 p.m. and no. 35, January 12, 4 p.m., in regard to plans for the establishment of salt, tobacco and other government monopolies in China.

It appears from the telegrams under reference that the Chinese Government plans to proceed with the establishment of a government salt monopoly, effective January 1, and that plans are being made, though not so far advanced, for a cigarette monopoly.

The Department has been aware for more than a year that the Chinese Minister of Finance was making plans to establish various government monopolies. Early in the year 1941, Mr. O. C. Lockhart, Associate Director General of the Chinese Government Salt Administration, furnished the Department with detailed plans for the creation of a salt monopoly. According to these plans the establishment of this monopoly would require an outlay of $1,500,000,000 (Chinese currency) to be financed by “loans” from the four government banks. It was fairly clear that new currency would have to be issued for the purpose at a time when China’s currency inflation was almost getting out of control. (At the present time the sum required would probably be two or three times the earlier estimate). Moreover the establishment of monopoly would oblige the government to incur vast new transport problems at a time when the government is having great difficulty in meeting its existing transport problems.

The Department did not take any action in regard to the proposed salt monopoly, as the establishment of the monopoly seemed at that time not to be a matter of imminence. However, the Department’s objections and opposition to the establishment of such a monopoly were made known to Ambassador Gauss in March 1941, prior to his departure for Chungking. Subsequently on July 4, 1941 the Department instructed Ambassador Gauss,26 at a time when the establishment of a tobacco monopoly seemed to be in process of being established in China, to take discreet and informal steps to discourage the establishment of a tobacco monopoly, to express this Government’s disapprobation of restrictive monopolies in general, and to point out [Page 498]the inflationary effects which arrangements for the financing of a tobacco monopoly in China would have upon China’s economy.

There is now under consideration the question of the extension of a substantial “political” loan to China. Although believing that an undertaking to refrain from the establishment of the monopolies in question should not be made a condition of such a loan, FE27 considers that opportunity might be taken by officers of this Department, and perhaps also of the Treasury Department, to point out informally to appropriate Chinese officials that the establishment of these monopolies in China at this time would seriously aggravate a situation which the contemplated loan would be designed at least in part to remedy. It could be suggested to the Chinese officials that, in view of the probable deleterious effect of the monopolies on the Chinese economy, it would seem to be advisable that plans for these monopolies should be dropped.

M[axwell] M. H[amilton]
  1. Telegram No. 131, July 4, 1941, 2 p.m., not printed.
  2. Division of Far Eastern Affairs.